Supreme Court says ordinary understanding of ‘final decision’ isn’t dispositive in bankruptcy appeals

Upon the commencement of a bankruptcy case, an automatic stay goes into effect. 11 U.S.C. Section 362. It is self-executing and no court order is required. The effect of the automatic stay is to prohibit and invalidate certain post-bankruptcy actions taken against the debtor, property of the debtor, or property of the bankruptcy estate. The purpose of the stay is to give the debtor a breathing spell from creditor action; to achieve an equality of distribution of property of the estate among claimants; and to promote an orderly administration of the bankruptcy case. The automatic stay prevents pre-bankruptcy litigation and other collection efforts from continuing against the debtor or property of the bankruptcy estate.

A party seeking to pursue a claim against the debtor or property of the bankruptcy estate, can request that the bankruptcy court grant relief from the automatic stay. 11 U.S.C. Section 362(d). In an opinion issued on Tuesday, the Supreme Court in Ritzen Group, Inc., Petitioner v. Jackson Masonry, LLC, 2020 DJDAR 216, addressed "the finality of, and therefore the time allowed for appeal from, a bankruptcy court's order denying a creditor's request for relief from the automatic stay." In ordinary civil litigation, a court's decision becomes "final" and a party can typically appeal as of right only upon completion of the entire case. This general rule is designed to prevent efficient judicial administration from being bogged down and undermined by piecemeal appeals. In contrast, a bankruptcy case takes the form of an umbrella under which there is an aggregation of individual disputes, many of which could be entire cases on their own.

Focusing on the fundamental distinction between a bankruptcy case and ordinary civil litigation, the Supreme Court found that "[t]he regime in bankruptcy is different." The court expanded upon this, stating that "[t]he ordinary understanding of 'final decision' is not attuned to the distinctive character of bankruptcy litigation." Citing prior precedent in Bullard v. Blue Hills Bank, 575 U.S. 496, 501 (2015), the court held "[o]rders in bankruptcy cases qualify as 'final' when they definitively dispose of discrete disputes within the overarching bankruptcy case." Further, in contrast to district court litigation, where appeals under 28 U.S.C. Section 1291 are normally limited to orders that resolve the entire case, the court explained that it is "common for bankruptcy courts to resolve discrete controversies definitively while the umbrella bankruptcy case remains pending."

The bankruptcy appeals statute recognizes the reality of the bankruptcy process by authorizing appeals as of right not just from final judgments in cases but from "final judgments, orders, and decrees ... in cases and proceedings." 28 U.S.C. Section 158(a). Proceedings are distinct units within the umbrella bankruptcy case. The Supreme Court said that it granted certiorari in Ritzen "to resolve whether orders denying relief from bankruptcy's automatic stay are final, therefore immediately appealable under §158(a)(1)."

The facts underlying Ritzen involved a failed sales contract. Ritzen Group agreed to purchase property from Jackson Masonry. The sale did not close. Subsequently, Ritzen sued Jackson in state court. The litigation continued for more than two years. Shortly before trial, Jackson commenced a bankruptcy case. As a result, the litigation was automatically stayed. Ritzen filed a motion requesting that the bankruptcy court lift the automatic stay. The motion was denied. Ritzen did not appeal. Instead, it litigated its claim in the bankruptcy court and lost. The bankruptcy court concluded that Ritzen, not Jackson, breached the contract. At that point, months after the stay relief denial, Ritzen filed two appeals to the district court. Ritzen appealed from the court's order denying relief from the automatic stay. It also appealed the breach of contract determination. The district court held that the first appeal was untimely and ruled against Ritzen on the merits in the second appeal. Ritzen then appealed to the 6th U.S. Circuit Court of Appeals.

The 6th Circuit began its opinion by harshly stating that "[d]eadlines matter. Ritzen Group missed two of them: the closing deadline in a contract and the appellate deadline for bankruptcy orders." In bankruptcy, parties must appeal final orders within 14 days of entry. 28 U.S.C. Section 158(c)(2); Fed. R. Bankr. P. 8002(a). The 6th Circuit found that the text of the bankruptcy appeals statute provides a clear test for court's to apply in determining whether an order is final, stating that "a bankruptcy court's order may be immediately appealed if it is (1) 'entered in [a] ... proceeding' and (2) 'final' -- terminating that proceeding." The 6th Circuit held that Ritzen failed this test and Ritzen appealed to the Supreme Court.

In order to obtain relief from the automatic stay, a party must file a motion with the bankruptcy court for an order "terminating, annulling, modifying, or conditioning" the stay, asserting in

support of the motion either "cause" or the presence of specified conditions. 11 U.S.C. Section 362(d). The Supreme Court found that "[a] majority of circuits and the leading treatises regard orders denying such motions as final, immediately appealable decisions." Rejecting each of Ritzen's arguments, the court reached the same conclusion.

First, the court rejected Ritzen's argument that stay-relief adjudication is properly considered a first step in the process of determining a creditor's claim against the estate. The court found that "[a] bankruptcy court's order ruling on a stay-relief motion disposes of a procedural unit anterior to, and separate from, claim-resolution proceedings" and that "[r]esolution of stay-relief motions does not occur as part of the adversary claims-adjudication process, proceedings typically governed by state substantive law." Next, the court disagreed with Ritzen's assertion "that an order denying stay relief simply decides the forum for adjudication of adversary claims --bankruptcy court or state court -- and therefore should be treated as merely a preliminary step in the claims-adjudication process." Instead, the Supreme Court found resolution of a motion for stay relief involves more than determining the forum for claim adjudication and can have substantial consequences.

The court expounded that "[d]isposition of the motion determines whether a creditor can isolate its claim from those of other creditors and go it alone outside bankruptcy. It can also

affect the manner in which adversary claims will be adjudicated. ... These are not matters of minor detail; they can significantly increase creditors' costs. Leaving the stay in place may, inter alia, delay collection of a debt or cause collateral to decline in value." The court further supported its conclusion by highlighting that outside the bankruptcy context, "[o]rders denying a

plaintiff the opportunity to seek relief in its preferred forum often qualify as final and immediately appealable, though they leave the plaintiff free to sue elsewhere."

Finally, the court rejects Ritzen's argument that the court's ruling will encourage piecemeal appeals and disrupt the efficiency of the bankruptcy process. The court found that the facts of the Ritzen case prove the opposite. Following denial of Ritzen's relief from stay motion, the parties had litigated extensively in the bankruptcy court and Ritzen lost. The court explained that "[b]y endeavoring now to appeal the stay-relief order, after forgoing an appeal directly after the denial, Ritzen seeks to return to square one. Its aim, to relitigate the opposing contract claims in state court. Never mind that the Bankruptcy Court has fully adjudicated the contract claims and has, without objection from Ritzen, approved Jackson's reorganization plan. The second bite

Ritzen seeks scarcely advances the finality principle." 